Why mandatory arbitration clauses are bad for business — and what companies should do instead

Last week my fellow blogger Stephanie West Allen forwarded to me a link to a provocative article recounting “Arbitration’s Fall From Grace“. It seems that companies which had been inserting mandatory arbitration clauses into contracts with their customers in an effort to avoid costly court battles are now finding themselves spending inordinate amounts of time and money fighting for the enforceability of these clauses in, ironically, court.

None of this should come as surprising news.

Many of us have long recognized that mandatory arbitration clauses are bad for business. They are bad for consumers and definitely bad for customer relations. Typically they form part of a contract of adhesion—a take-it-or-leave-it, one-sided agreement consisting of terms that the customer has no power to bargain for, usually printed in a microscopic font barely visible to the naked eye written in language that even lawyers have trouble understanding. This agreement is never directly brought to the attention of the customer, since it typically arrives in an envelope packed with advertising material and other irrelevancies–most customers are blissfully unaware that such an agreement exists at all.

Think about the message a mandatory arbitration clause conveys to the customer. Basically the message is this:

If you have a legal beef with us, you can’t go to court.

You have to use arbitration, and you will have to share with us the costs for the arbitrator’s services (of course if you could go to court, which you can’t, you’d be getting the judge’s time for free, courtesy of taxpayers).

We, not you, get to pick the dispute resolution services company which will provide the arbitrator.

If lots of you have a beef with us, you can’t join forces in a class action law suit to enforce your legal rights collectively and publicly. That would level the playing field between us, a mega-corporation, and you, an insignificant flyspeck of a customer. We can’t allow that.

This dispute will be resolved according to the laws of a state far, far away from where you live and work–laws which favor us, not you.

In short, we are going to stack the deck so thoroughly against you that you have little hope of achieving justice.

Thanks, and have a nice day.

Mandatory arbitration clauses, in my own experience, seem to be favored by large corporations with poor customer service records and a history of unfair or deceptive business practices. Mandatory arbitration clauses are a way to limit corporate accountability to customers.

As arbitration has fallen out of favor, mediation, a less frequently discussed alternate dispute resolution method, seemingly is gaining traction among corporations. Though the same issues that plague arbitration — a lack of discovery rights and enforceability — remain in mediation, the less-structured environment tends to be cheaper, less adversarial and quicker than an arbitration hearing.

At a recent continuing legal education event for corporate counsel in Atlanta, speaker David C. Vigilante, associate general counsel and chief litigation counsel at Turner Broadcasting, told the audience that he’s not a fan of arbitration because the process requires companies to give up some legal rights — and it’s binding. He called mediation “the worthwhile companion to its less worthwhile exercise, arbitration.”

In an interview after the event, he added that “most lawyers will tell you today that mediation is one of the most fantastic things to come along.”

Not surprising when mediation encourages communication, addresses misunderstandings, and levels the playing field for all parties at the table.